Four years after the Brexit referendum vote, the future trading relationship between the UK and the rest of the EU remains uncertain with the Government and EU leaders under pressure to reach an accord before the post-Brexit transition period expires on December 31st 2020.
Many of our clients have wondered what impact disentangling the UK from decades of EU integration will have on their ability to claim back R&D investment, through either the SME or RDEC R&D tax credit schemes. Despite the lack of clarity on the future of the R&D tax credit schemes, the Government has repeatedly stated the importance of R&D to improving the UK’s economic productivity. As such, we are confident the schemes will remain a valuable option for innovative businesses post-transition, albeit in a possibly altered state.
SME R&D Tax Credit Scheme and Brexit
The scheme for small and medium sized businesses currently operates under the EU’s State Aid Legislation that limits EU member states’ level of R&D subsidisation to level the playing field. We predict that the EU will likely require the UK to comply with existing state aid rules to secure a new trading partnership. Conversely, in the event of a no deal Brexit, the UK will not be bound by state aid rules and can more flexibly allocate R&D tax relief in line with the country’s economic objectives.
The UK is currently 11th in the EU in terms of % of GDP expenditure on R&D (1.7%) and the Government has committed to reaching 2.4% by 2027. The flexibility to make our own R&D regulations outside of EU diktat could make this goal more achievable but it ultimately depends on what the Government decides to do.
The Government has already postponed the proposed limit of 3x payroll and national insurance costs for loss-making SMEs to 2021, and ministers are considering including data and cloud computing costs to the scheme from 2021. The future health and value of the SME R&D tax credit scheme looks positive and recent Government decisions point towards continued commitment to this facility into the future. This long term commitment is further evidenced by the incremental increase of enhancement rates from 150% before 2008 to 230% in 2020, a trend that could continue post-Brexit.
R&D Expenditure Credit (RDEC) Scheme and Brexit
Like the SME facility, the future of the R&D Expenditure Credit (RDEC) scheme for larger enterprises is unknown and will depend on the future relationship we have with the EU. The RDEC rate was increased to 13% in 2020 which demonstrates that the Government is committed to encouraging businesses to stay and innovate in the UK.
There are a few policy implications of Brexit that might impact larger businesses. For example, placing a £30k salary floor for migrants entering the UK might make research graduates ineligible for entry, therefore starving British businesses of valuable knowledge and expertise. Also, the introduction of IR35 legislation, now postponed until April 2021 due to Covid-19 uncertainty, will likely limit the inclusion of freelance contractor costs as part of R&D tax claims.
We will continue to update this page as and when the Government clarifies these positions and how they will translate to post-Brexit R&D tax policy.
How might the Government’s Infrastructure Plans Impact R&D Tax Credits?
In March 2020, the Government set out a five year plan to spend £640bn on infrastructure projects that include telecommunications, energy, roads, railways, schools, and hospitals. These measures aim to address the regional disparities in the country’s infrastructure and to decarbonise the economy in line with the 2050 net-zero carbon target. How this colossal sum will be allocated by region and sector will be announced later in the year and, until then, we remain unsure as to the regional and sectoral impact.
Latest statistics from HMRC state that the average claim in the North West is £48k compared to £120k for the West Midlands. As every £1 spent on R&D promotes up to £2.30 of additional expenditure in that regional community, there is real opportunity for new infrastructure investment to help close this gap and get more businesses in the North West, and elsewhere, to benefit from R&D tax credit schemes.
Regardless of apportionment, the Government’s investment plans will likely benefit R&D claimants in affected sectors and provide unprecedented opportunities for technological advancement.
What should we do in this climate of uncertainty?
We can do little about the economic and regulatory uncertainties stemming from Brexit and the Covid-19 pandemic except carry on as normal under existing R&D tax frameworks until trade talks conclude later in the year. Until then, tax specialists cannot write with much authority about the future of R&D and Brexit except speculate and keep in close communication with the business community.
Our tax experts are on hand to advise you on how policy and regulations will impact your R&D tax relief claim. With over 20 years’ experience in submitting R&D tax relief claims to HMRC for thousands of clients, Cost Care Tax’s effortless claims process will help maximise financial rewards at a time when they are most needed.
Contact us for a no obligation phone call or for more information.